DIALECTIC PR LLC v. THINKING GROUP LTD

HCCL 8/2020

[2025] HKCFI 1555

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 8 OF 2020

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J U D G M E N T

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A. INTRODUCTION

1.  Dialectic PR LLC (“the Plaintiff”)  claims against Thinking Group Limited (“the Defendant”)  for breach of contract, alleging that the Defendant sold it KN95 face masks which failed to meet agreed standards.

B.  THE BACKGROUND

2.  The following matters, taken from the pleadings, parties’ agreed statement of facts, dramatis personae and chronology, or undisputed documents, are undisputed or indisputable, and I find them as facts.

B1.  The parties

3.  The Plaintiff is a trading company incorporated in Puerto Rico, operating in the United States and Europe.  Its Chief Executive Officer is Zachary Zeltzer (“Mr Zeltzer”).

4.  The Defendant is a company incorporated in Hong Kong, carrying on business as an exporter and distributor of manufactured products to the United States and elsewhere.  It is owned by Mr Shen Nong (“Mr Shen”).

B2.  The Contracts

5.  In early 2020, the global Covid-19 pandemic broke out.  Prior to that time, neither the Plaintiff nor the Defendant had prior experience in dealing with face masks.

6.  Between 5^th to 11th April 2020, the Defendant agreed to sell, and the Plaintiff agreed to buy, various lots of face masks of “KN95” standard (“the Contracts”): 

6.1  250,000 KN95 masks at the price of US$1.18 per mask;

6.2  2,000,000 KN95 masks at the price of US$1.22 per mask;

6.3  150,000 KN95 masks at the price of US$1.12 per mask.

7.  The first lot was originally also the subject of these proceedings, but the claim in relation to this was withdrawn on the first day of the trial.

8.  There were sales of other masks between the parties which are not the subject of the current proceedings.

9.  The Defendant was aware (whether before, at the time of, or after the Contracts were made)  that the Plaintiff required the masks for onward sale in the USA or Europe.

10.  It was an express condition of the Contracts that the masks supplied by the Defendant should comply with the “KN95” description in the Contracts, as described below.

11.  It was an express condition of the Contracts that the outer packaging of the masks, that is, the boxes containing the masks, should bear the contractual description of the type and standard of masks contained in the boxes, that is, a reference to the applicable KN95 standard.

12.  It was an express condition of the Contracts that the Defendant was to deliver the masks to the Plaintiff’s nominated logistics provider in mainland China, which, to the Defendant’s knowledge, was for the purpose of onward transport out of mainland China.

13.  The Contracts contained the following implied conditions:

13.1  that the masks should be reasonably fit for the said purposes for which the Plaintiff required them;

13.2  the masks should be of merchantable quality;

13.3  the masks should be properly packaged and labelled and the labelling of the packaging of the masks should be accurate.

B3.  The various mask standards

14.  As mentioned above, it was an express condition of the Contracts that the masks supplied by the Defendant should comply with the “KN95” description in the Contracts.  These were certain performance and quality standards, in particular in relation to filtration efficiency requirements, as follows:

14.1  in the case of all the masks, of the Chinese “GB2626-2006” standard set by the Standardisation Administration of the People’s Republic of China, which applied at the material time (“the Chinese Standard (GB2626-2006)”); and

14.2  in the case of masks destined for Europe, of the equivalent European standard, which is the European Union “EN149:2001+A1:2009 FFP2” standard set by the European Committee for Standardisation (CEN)  Technical Committee (TC)  (“the EU Standard (EN149:2001+A1:2009 FFP2[1])”).

15.  In the USA, the US National Institute for Occupational Safety and Health (“NIOSH”)  promulgated on 31^st March 2020 a temporary test protocol under the then state of public health emergency in the USA for testing masks (“the US Modified NIOSH Test”).  This was to permit entry of overseas-made masks into the USA during the Covid-19 pandemic, and used only the filtration efficiency performance aspect (rather than the full criteria)  of the NIOSH standard which was applicable in assessing N95 respirators.

16.  Both the Chinese Standard (GB2626-2006)  and the US Modified NIOSH Test specify the same aerosol particle challenge.  If the masks sold by the Defendant were unable to meet the requirements under the US Modified NIOSH Test, they could not have met the Chinese Standard (GB2626-2006)  either.

17.  Under the Chinese Standard (GB2626-2006)  and the US Modified NIOSH Test, the filtration efficiency performance required for the masks was a 95% filtration rate, using a sodium chloride aerosol challenge.  Under the EU Standard (EN149:2001+A1:2009 FFP2), the filtration efficiency performance required for the masks was a 94% filtration rate, but for both a sodium chloride aerosol and a paraffin oil aerosol challenge.

B4.  The masks manufactured and shipped pursuant to the Contracts

18.  The masks were made by one of three manufacturers - Jiangxi Meipin Medical Technology Co Ltd, (“Meipin”), Foshan Jintailang Trading Co Ltd (“Jintailang”), or Shenzhen Jielixin Technology Co Ltd (“Jielixin”), and shipped in batches as follows.

Shipment number	Quantity / manufacturer	Shipment date	Destination	Arrival date
1	250,000 Meipin	20th April 2020	USA	29th April 2020
2	150,000 Jielixin	24th April 2020	Germany (via Brussels)	within May 2020
3	500,000 Jintailang	29th April 2020	USA	2nd May 2020
4	750,000 Xianda	30th April 2020	USA	5th and 7th May 2020
5	750,000 Xianda	30th April 2020	Germany (via Brussels)	before 20th May 2020

19.  At trial, the masks were referred to by their shipment number.

19.1  Shipment 1 was the first lot of 250,000 KN95 masks earlier referred to, ordered at US$1.18 per mask.  The Plaintiff withdrew its claim in relation to these on the first day of trial.

19.2  Shipment 2 comprised the 150,000 masks ordered at US$1.12 per mask.

19.3  Shipments 3, 4 and 5 comprised the 2,000,000 masks ordered at US$1.22 per mask.  Shipments 4 and 5 were made by the same manufacturer, Xianda, in one go, but subsequently split up by the Plaintiff into two lots for shipping to different destinations.

19.4  It was common ground that (save in relation to shipments 4 and 5)  the various shipments should not be treated as comprising one composite order, such that establishing that the masks of one shipment were defective would not amount to establishment of a breach of contract for another shipment, given that they were manufactured by different manufacturers. However, there is a dispute as to whether shipments 4 and 5 should be treated as one order: the Plaintiff says that they should, as they were manufactured by Xianda in one batch; the Defendant says that they should not, as they were shipped separately to different places.  I return to this below.

20.  The standards printed on the boxes in which the masks were packaged were as follows.

Shipment number	Quantity/ manufacturer	Destination	Standards marked on packaging
2	150,000 Jielixin	Germany	EN 149:2001+A1:2009 FFP2 GB2626-2006
3	500,000 Jintailang	USA	FPP2 GB2626-2006 EN 149:2001+A1:2009
4	750,000 Xianda	USA	FFP2 EN 149:2001+A1:2009 GB2626-2006
5	750,000 Xianda	Germany	FFP2 EN 149:2001+A1:2009 GB2626-2006

B5.  The production dates of, and tests carried out for, the masks

B5.1  Shipment 2 – the 150,000 Jielixin masks sent to Germany

21.  Part or all of the 150,000 Jielixin masks were manufactured between 14^th and 16^th April 2020.

22.  On 1^st April 2020, NPS Laboratory Company Limited (“NPS”)  issued a “Certificate of Verification PPE Test Report” to Jielixin, regarding the testing of KN95 masks manufactured by Jielixin.  The report certified that the sample of masks manufactured by Jielixin and received by NPS on 19^th March 2020 complied with the EU Standard (EN149:2001+A1:2009 FFP2). 

23.  Jielixin commissioned a test report by the Shenzhen Academy of Metrology & Quality Inspection (“SAMQI”)  dated 14^th April 2020.  The report indicated that the sample of KN95 masks manufactured by Jielixin and tested from 8^th April to 13th April 2020 met the Chinese Standard (GB2626-2006)  with a filtration efficiency of over 95%, with the samples ranging from 96.27% to 97.08% filtration efficiency.

24.  After arrival in Germany, the masks were not tested.

B5.2  Shipment 3 – the 500,000 Jintailang masks sent to the USA

25.  Part or all of the 500,000 Jintailang masks were manufactured on 23^rd April 2020.

26.  Earlier, on 2^nd April 2020, a “Certificate of Compliance” was issued by Ente Certificazione Macchine Srl (“Ente”)  to Jintailang in respect of its KN95 masks, verifying that the technical documentation received from Jintailang was satisfactory for the requirements of the ECM Certification Mark, such that the mark could be affixed to the products. However, Ente was not registered with the relevant EU authorities to issue such certification in respect of personal protective equipment under the European Commission’s Directive 2016/425.  

27.  On 10^th April 2020, a “Technical Construction File” issued by the Guangdong Testing Institute of Product Quality Supervision (“GTS”)  stated that the KN95 masks produced by Jintailang complied with an EU Standard (EN149:2001+A1:2009)  (but without identifying whether, for the penetration of the mask filter, the standard for FFP1, FFP2, or FFP3 was met), based on a sample received on that date.

28.  On 28^th April 2020, Brilliante Inspection (“Brilliante”), on the engagement of the Plaintiff, carried out product quantity verification in respect of the Jintailang masks.  The inspection was limited to checking the quantity of packages tendered and sighted, brief visual checks of a small sample of the packages to check the outer packaging, and brief visual checks of a small sample of the masks to verify the apparent product type. At the time of inspection, 147,600 out of 500,000 masks had been packed and were seen by Brilliante; a further 500,000 to 600,000 masks had been seen but not yet packed. 

29.  The US Customs and Border Protection Agency, acting in accordance with the US Food and Drug Administration (“FDA”)  requirements under the Covid-19 pandemic “Emergency Use Authorization Regulation”, seized and sequestered the Jintailang masks for compliance testing by NIOSH’s National Personal Protective Technology Laboratories operated jointly by the FDA and the Centers for Disease Control and Prevention of the USA (“NIOSH Laboratories”).

30.  On or about 21^st May 2020, the NIOSH Laboratories tested a sample of thirty pieces from Shipment 3, using the US Modified NIOSH Test.  The report of the findings (“the NIOSH Report”)  stated that:

30.1  the maximum and minimum filtration efficiency of the samples were 87.30% and 11.10% respectively.  The filtration efficiency of all thirty samples measured less than 95%;

30.2  limited assessment of ear loop designs of the masks indicated difficulty in achieving a proper fit.

B5.3  Shipments 4 and 5 – the 750,000 Xianda masks sent to the USA and the 750,000 Xianda masks sent to Germany

31.  Part of the 1,500,000 Xianda masks were manufactured on 25^th April 2020.  As at 28^th April 2020, 40,000 were still in production.

32.  Earlier, on 8^th April 2020, a certificate issued by ICR Polska Co Ltd (“ICR”)  certified that “XD-KN95” and “XD-N95” masks produced by Xianda complied with the EU Standard (EN149:2001+A1:2009 FFP2), based on a test sample.

33.  Xianda commissioned a test report by SAMQI dated 23^rd May 2020.  The report indicated that the sample of KN95 masks manufactured by Xianda on 25^th April 2020 and tested on 23^rd May 2020 met the Chinese Standard (GB2626-2006)  with a filtration efficiency of over 95%, with the samples all at 99.99% efficiency. 

34.  On 28^th April 2020, Brilliante, on the engagement of the Plaintiff, carried out product quantity verification in respect of the Xianda masks.  As with the Jintailang masks, the inspection was limited to checking the quantity of packages tendered and sighted, brief visual checks of a small sample of the packages to check the outer packaging, and brief visual checks of a small sample of the masks to verify the apparent product type. At the time of inspection, 1,200,000 out of 1,500,000 masks had been packed and were seen by Brilliante; a further 260,000 had not yet been packed, and 40,000 were still in production. 

35.  Shipment 4 was sent to the USA.  It was not tested on arrival.

36.  Shipment 5 was sent to Germany.  Between 25^th May 2020 and 2^nd June 2020, DEKRA Testing and Certification GmbH (“DEKRA”)  tested three masks from Shipment 5 which had been supplied by the Plaintiff’s customer on 20th May 2020.  The Plaintiff did not know how the samples were selected.  DEKRA is an officially authorised EU Notified Body for the assessment and granting of “CE” certification for respiratory protective equipment under EU Regulation 2016/425.

37.  On 3^rd June 2020, DEKRA issued a test report in respect of the masks tested (“the DEKRA Report”).  The DEKRA Report stated that:  

37.1  in terms of the penetration of the mask filter medium, the test requirement under section 8.11 of EN149:2001+A 1:2009 is that the penetration at 95 l/min paraffin oil must be ≤ 6%;

37.2  the penetration of the filter medium of the masks, tested at 95 l/min paraffin oil, measured between 81.83% and 85.39%;

37.3  the tested masks failed the “Penetration of the filter medium” test.

B5.4  Rejection of the masks; disposal

38.  By an email of 17^th June 2020 to Mr Shen, Mr Zeltzer gave notice that the Plaintiff considered the masks in Shipments 1 to 5 to be non-conforming and were rejected.[2]

39.  The 150,000 Jielixin masks in Shipment 2 were abandoned by the Plaintiff.

40.  The 500,000 Jintailang masks in Shipment 3 had to be relabelled as required by the FDA before they were released.  There was no demand for them.

41.  The 750,000 Xianda masks sent to the USA in Shipment 4 were abandoned by the Plaintiff.

42.  739,360 of the 750,000 Xianda masks sent to Germany in Shipment 5 were sold to Easybution GmbH (“Easybution”)  at US$0.19 per mask between August and November 2020 (US$149,478.40 in total).  The rest were abandoned by the Plaintiff.

43.  The Plaintiff incurred various costs in respect of the masks in Shipments 2 to 5, including freight, duties and storage costs.

C.  THE ISSUES

44.  Prior to trial, the parties agreed a list of issues to be determined. Three of them (issues 1, 2 and 8)  fell away in the course of the trial.  The rest are as follows.  To avoid confusion, I have retained the numbering from the original list of issues.

44.1  Issue 3: Were the conditions of the Jintailang masks when they were tested by the NIOSH Laboratories in the USA the same as when the Defendant delivered them to the Plaintiff’s nominated logistics provider in mainland China?

44.2  Issue 4: Was the testing procedure, in particular the mounting and sealing method of the tested masks adopted by the NIOSH Laboratories as referred to in the NIOSH Report, prone to air leakage?

44.3  Issue 5: Are the results of the NIOSH Report suggestive of air leakage in the testing procedure?

44.4  Issue 6: What is the effect on the test results if there was air leakage and how does that affect the reliability of the NIOSH Report?

44.5  Issue 7: In light of the findings above, was the filtration efficiency of the Jintailang masks below the relevant standard?

44.6  Issue 9: Were the conditions of the Shipment 5 Xianda masks when they were tested by DEKRA in Germany the same as when the Defendant delivered them to the Plaintiff’s nominated logistics provider in mainland China?

44.7  Issue 10: Are the DEKRA test results reliable in showing that the filtration efficiency of the Shipment 5 Xianda masks was below the relevant standard?

44.8  Issue 11: Were the respective lots of masks in Shipments 2 to 5 not reasonably fit for purpose, not of merchantable quality, not properly and accurately labelled or packaged, or not fit or able to be sold as originally intended in the US and/or Germany (as the case may be)  as KN95 compliant masks?

44.9  Issue 12: What loss and damage, if any, has the Plaintiff suffered by reason of:

44.9.1  such defects as are found to have been established for the masks, and

44.9.2  such mislabelling and inaccurate packaging as are found to have been established for the masks?

45.  I will group the issues to be dealt with together by reference to the shipments to which they relate.  I will then address Shipments 2 and 4, which are not specifically addressed by the parties’ list of agreed issues.

D.  SHIPMENT 3: THE 500,000 JINTAILANG MASKS; ISSUES 3 TO 7

D1.  Issue 3: Were the conditions of the Jintailang masks when they were tested by the NIOSH Laboratories in the USA the same as when the Defendant delivered them to the Plaintiff’s nominated logistics provider in mainland China?

46.  The Plaintiff accepts that it bears the burden of showing that the Jintailang masks were non-conforming as at the time when they were delivered to its nominated logistics provider in mainland China.

47.  The Jintailang masks were tested by the NIOSH Laboratories after they arrived in the USA.  The Defendant does not accept that they were in the same condition at the time of testing as when they were delivered to the Plaintiff’s agent in mainland China. The Defendant complains that the Plaintiff failed to adduce sufficient evidence to discharge its burden of proof.  The Plaintiff acknowledges that it has not adduced any direct evidence as to the conditions in which the masks were transported from the Jintailang factory to the NIOSH Laboratories, but says that it can be inferred from the circumstances that they were in the same condition at the time of testing as when the Plaintiff took delivery of them.

48.  Counsel for the Defendant, Mr Alexsander Wong, accepted that it is open to the court to draw such an inference.  He submitted that the inference should not be drawn, given that the masks were goods which could have been affected by storage and handling conditions.  He relied on the warning on the packaging that the masks should be stored in the range of -20 to +30 degrees Celsius and at a relative humidity of not more than 80%.  Mr Shen, who gave evidence for the Defendant, said that the masks could have been damaged by people before testing, or altered by steaming with hot steam.

49.  It is true that no direct evidence was given as to the conditions in which the Jintailang masks were transported.  However, there are the following circumstances which are relevant to the making of an inference as to the condition of the masks at the time of testing.

49.1  The masks were individually wrapped in sealed film packets. They were then boxed in batches of fifty.  The boxes were then packed in brown cardboard boxes, which in turn were partly wrapped in plastic for the purpose of carriage.  Brilliante checked some of the outer packaging of the masks and did not report any problems.

49.2  As printed on the boxes, the masks had a shelf life of three years.  They were not perishable goods.

49.3  The temperature and humidity range acceptable for storage could not be said to be particularly different from everyday conditions.

49.4  Of course, none of these factors preclude the possibility that something untoward nevertheless happened to the masks during the journey.  But equally, there is nothing to suggest that anything adverse happened to the masks such as to alter their condition from that in which they had been at the time of delivery a short while previously.  The NIOSH Report did not record that any problem was observed with the masks received for testing.

50.  The Defendant relied on the “Certificate of Compliance” issued by Ente on 2^nd April 2020.  However, the certificate apparently related to the technical documentation from Jintailang rather than any actual testing of masks, and in any event not the masks in Shipment 3.  Furthermore, the Plaintiff pointed to evidence to show that Ente was not one of the authorised bodies to issue such certification in the first place.

51.  The Defendant also relied on the “Technical Construction File” issued by GTS relating to the sample masks tested by it on 10^th April 2020. Whilst the test was close in time to the production of the masks in Shipment 3, it could not have been a test of the masks actually in Shipment 3 which were subsequently made.  Furthermore, the report does not indicate whether the masks were tested against the filtration efficiency required by FFP1, FFP2 or FFP3 of the EU Standard (EN149:2001+A1:2009).  Masks meeting the FFP1 requirements would not necessarily have met the FFP2 requirements.

52.  In the circumstances, I accept that on a balance of probabilities, the Plaintiff has sufficiently established that the Jintailang masks were in the same condition at the time of testing as when the Plaintiff took delivery of them.

D2.  Issues 4 to 6: the testing of Shipment 3 samples by the NIOSH Laboratories

53.  The masks tested by the NIOSH Laboratories were the ones in Shipment 3.  The NIOSH Report found that for the thirty samples tested, the maximum and minimum filtration efficiency were 87.30% and 11.10% respectively, and that none achieved 95% filtration efficiency.

54.  The Plaintiff sought to rely on the NIOSH Report; the Defendant sought to discredit it.

55.  The parties jointly appointed an expert witness, Professor Simon Lam, to give an opinion on the questions arising under Issues 4 to 6. There was no dispute about his methodology, which I will therefore not dwell on at length.  In a nutshell, Professor Lam analysed 7,413 tests of masks carried out by the NIOSH Laboratories similar to the test carried out in the NIOSH Report.  The data in 1,963 of these tests were subject to statistical analysis to establish the correlation between various parameters relating to the masks tested, such as the initial filter resistance displayed by the mask when tested and the filter efficiency of the mask.  The data from all 7,413 tests were then analysed to see whether they were consistent with the correlations established (they were). The NIOSH Report was then analysed against this information.  The risk of air leakage in the testing of any particular mask sample was assessed based on how low the initial filter resistance of the sample was as compared to the mean initial filter resistance of the entire batch, considered against the background of the other NIOSH tests reviewed by Professor Lam.

D2.1  Issue 4: Was the testing procedure, in particular the mounting and sealing method of the tested masks adopted by the NIOSH Laboratories as referred to in the NIOSH Report, prone to air leakage?

56.  Mr Wong relied on paragraph 4.1 of Professor Lam’s report, which stated that the NIOSH Test (defined as that used for testing the Shipment 3 samples)  had a potential risk of air leakage because (1)  the chemical adhesive used for mounting the mask might not be secure enough, and (2)  the 85 litres per minute air flow rate used in the test might contribute to the risk of air leakage.

57.  However, as clarified in his oral evidence, Professor Lam was simply identifying hypothetical possibilities as to why air leakage could occur in testing, rather than discussing what actually happened in the test of the Shipment 3 samples.  He was also not suggesting that the testing method was “prone” to leakage (in the sense of having any particular tendency for leakage).

58.  In fact, when challenged as to how he could opine (in paragraph 4.4.3)  that the incidence of air leakage in testing by NIOSH was low, Professor Lam explained that whilst he had not read every single one of the 7,413 tests (and therefore could not be certain of the occurrence rate of air leakage, as he stated in paragraph 4.4.3), he had read over 1,000 of the tests, and based on his analysis, for most of the traditional conventional mask brands, there were no signs of air leakage affecting the testing.  Had air leakage been a common problem, it would have been apparent from the tests he reviewed.

59.  I accept Professor Lam’s evidence and answer Issue 4 in the negative.

D2.2 Issue 5:  Are the results of the NIOSH Report suggestive of air leakage in the testing procedure?

60.  One of the thirty test samples in the NIOSH test, sample number 6, had an initial filter resistance, and a filtration efficiency, significantly lower than those of the other samples.  In paragraph 4.2 of his report, Professor Lam opined that there was a high chance that this was due to air leakage in the testing of the sample. He went on to say that there was no sign of leakage in the testing of the other twenty-nine samples.  The Defendant submitted that since Professor Lam considered that testing by NIOSH was subject to the risk of air leakage, it was unclear how Professor Lam could say that one sample suffered from it but not the others.

61.  First of all, as addressed above under Issue 4, Professor Lam did not in fact take the view that the NIOSH Test (or testing by NIOSH generally)  had a risk of air leakage.

62.  In his oral evidence, Professor Lam clarified that the reason for the figures for sample number 6 was likely to be either air leakage or physical damage to the mask, as mentioned earlier in his report.  He had focused on air leakage in paragraph 4.2 as he was there seeking to respond to the specific questions posed to him and he had been asked about the chance of air leakage (rather than physical damage).

63.  Thus Mr Wong’s reliance on paragraph 4.2 of Professor Lam’s report does not provide much assistance.  The aberrant results for sample number 6 might have been due to air leakage, or they might have been due to the particular mask being damaged.

64.  Mr Wong went on to submit that Professor Lam had said in cross-examination that air leakage might occur to a varying degree and that he could not discount the possibility that all of the masks were affected by leakage to varying degrees, and that he could not tell, based on the test results, how bad the leakage was.  However, this does not give a balanced portrayal of Professor Lam’s evidence.  It had been put to Professor Lam that if the mounting of the mask during testing had a potential risk of leakage, then it was not too far-fetched to say that all of the test samples had been affected to varying degrees.  Professor Lam had disagreed with this proposition, explaining that he had studied not only the test of the thirty (Jintailang)  samples, but also many other tests carried out by NIOSH, and that whilst it was true that he could not conclusively rule out the possibility of leakage having affected the twenty-nine samples, he did not think that they had been so affected, based on the low incidence of air leakage affecting the tests carried out by NIOSH (as discussed under Issue 4).

65.  It is therefore incorrect for the Defendant to submit that Professor Lam held the opinion that the NIOSH Test was prone to air leakage, and based on this, to submit that there was a possibility that all of the tests (for the Jintailang mask samples)  were affected, thus in turn affecting the reliability of the NIOSH Report.[3]

66.  I accept Professor Lam’s evidence and answer Issue 5 in the negative.

D2.3  Issue 6: What is the effect on the test results if there was air leakage and how does that affect the reliability of the NIOSH Report?

67.  Professor Lam was of the view that air leakage for sample number 6 would have led to an underestimate of the filtration efficiency of that sample, and this would have had a slight impact on the reliability of the NIOSH Report.

68.  However, this would not have affected the reliability of the NIOSH Report as regards the other samples.[4]  Those other samples all failed to meet the requirement of a 95% filtration efficiency as required by the Chinese Standard (GB2626-2006)  or the US Modified NIOSH Test.

D2.4  Issue 7: In light of the findings above, was the filtration efficiency of the Jintailang masks below the relevant standard?

69.  Given my findings in relation to issues 3 to 6, the answer to this must be “yes”.

E.  SHIPMENT 5: THE 750,000 XIANDA MASKS SENT TO GERMANY; ISSUES 9 TO 10

E1.  Issue 9: Were the conditions of the Shipment 5 Xianda masks when they were tested by DEKRA in Germany the same as when the Defendant delivered them to the Plaintiff’s nominated logistics provider in mainland China?

70.  As with Shipment 3, the Defendant does not accept that the Xianda masks tested by DEKRA were in the same condition at the time of testing as when they were delivered to Plaintiff’s nominated logistics provider in mainland China.

71.  Mr Wong submitted that the evidence in relation to Shipment 5 was even more unsatisfactory, as the masks travelled to Germany via Brussels; the three masks tested by DEKRA were supplied by the Plaintiff’s customer Easybution, and there was no evidence as to how they were selected, or the conditions in which they were transported to DEKRA; and Easybution could not be said to have been a disinterested party as it subsequently acquired almost all of the masks in the shipment at a substantial discount.

72.  As with Shipment 3, the Xianda masks were individually wrapped, boxed and packed in brown cardboard boxes.  The masks were stated to have a validity of two years.  Brilliante checked some of the outer packaging of the masks and did not report any problems.  Again, these factors do not preclude the possibility that something happened to the masks during their journey from mainland China to Brussels and then to Germany. But there is nothing to suggest that anything adverse happened to them such as to alter their condition from that in which they had been at the time of delivery a short while previously.  The DEKRA Report did not report that any problem was observed with the samples received for testing.  The mere fact that Easybution subsequently acquired the masks at a discount as face coverings which did not meet the KN95 standard does not mean that anything underhand took place in the selection and delivery of masks for testing by DEKRA, or indeed that Easybution was not interested in in the first place in obtaining goods which met the EU Standard (EN149:2001+A1:2009 FFP2), and Mr Wong quite properly did not suggest otherwise.

73.  The Defendant relied on the certificate issued by ICR on 8^th April 2020 stating that the masks produced by Xianda complied with the EU Standard (EN149:2001+A1:2009 FFP2), and the SAMQI report which stated that a sample of the masks tested on 23^rd May 2020 met the Chinese Standard (GB2626-2006).  However, these do not relate specifically to Shipment 5, so they do not shed light on the state of the masks at the time of delivery to the Plaintiff’s agent.  Mr Wong also fairly acknowledged that the SAMQI test was carried out using sodium chloride rather than the paraffin oil required by the test for the EU Standard (EN149:2001+A1:2009 FFP2).

74.  In the circumstances, I accept that on a balance of probabilities, the Plaintiff has sufficiently established that the Xianda masks were in the same condition at the time of testing as when the Plaintiff took delivery of them.

E2.  Issue 10: Are the DEKRA test results reliable in showing that the filtration efficiency of the Shipment 4 Xianda masks was below the relevant standard?

75.  The DEKRA Report stated that the penetration of the filter medium of the masks, tested at 95 l/min paraffin oil, measured between 81.83% and 85.39%.  In other words, their filtration efficiency did not achieve 94% as required by the EU Standard (EN149:2001+A1:2009 FFP2).

76.  The challenge originally mounted by the Defendant to the DEKRA Report was to say that the reason stated for the failure to achieve the required filtration efficiency was that the “Material used is not suitable in the tested setup”.  On a closer reading of the DEKRA Report, however, it could be seen that this was merely included in a “glossary” of possible explanations as to why a test subject may have failed any test performed, or why a test may not have been performed at all; in other words, the glossary did not purport to address the specific facts of the test reported on in the DEKRA Report.  Indeed it should have been apparent that the glossary was merely a such a list – for example, on the first page of the glossary, the reasons given for “obvious leaks in the area of the chin” included “headgear not strong enough” next to “headgear too strong”, which clearly could not both be true at once (and which had no application to the test subjects in question which had no headgear at all).

77.  It was then said that the possible reason of “Material used is not suitable in the tested setup” remained an express possibility as to why the masks tested had failed the test. However, this possible reason would appear to be more apt to explain a case where a test was not performed at all, rather than the present case where a test was performed.

78.  Mr Wong then submitted that merely testing three masks out of the whole batch could not be said to be representative.  However, there is no expert evidence to support this.[5]

79.  There is therefore nothing to cast doubt on the reliability of the DEKRA Report.

80.  I therefore answer “yes” to Issue 10.

F.  SHIPMENT 2: THE 150,000 JIELIXIN MASKS

81.  The parties did not formulate a specific issue in relation to Shipment 2.

82.  The Plaintiff says that these masks were sold to Easybution; that Easybution had also purchased Shipment 5 (the 750,000 Xianda masks sent to Germany); and that Easybution had rejected both shipments after learning of the results in the DEKRA Report.

83.  The Defendant originally did not accept that the Jielixin masks were sold to Easybution.  However, there are a number of documents which support this, for example, an invoice dated 15^th April 2020 from Shenzhen Thinking Shenblueness Technology Co Ltd (“Shenzhen Thinking”)[6] for 150,000 KN95 masks at the price of US$1.18 addressed to Easybution, and an undated packing list from Shenzhen Thinking to Easybution for 150,000 KN95 masks.  In addition, Mr Zeltzer’s evidence that Easybution refused to accept Shipments 2 and 5 in the light of the DEKRA Report was not challenged.  I accept on the balance of probabilities that Shipment 2, comprising the Jielixin masks, were on-sold by the Plaintiff to Easybution.

84.  However, whether or not the Jielixin masks were sold to Easybution, the relevant point for present purposes is that there is no evidence that they failed to meet the contractual standards.  Whilst Easybution may have rejected the masks because of the DEKRA Report, DEKRA did not in fact test any of the masks made by Jielixin, a completely different manufacturer to Xianda.  The DEKRA Report cannot constitute any evidence of defects in the Jielixin masks.

85.  Evidence as to quality, such as there is, consists of the NPS “Certificate of Verification PPE Test Report” of 1^st April 2020 and the SAMQI report of 14^th April 2020, indicating that samples tested at about the time when the masks in Shipments 2 were made met the EU Standard (EN149:2001+A1:2009 FFP2)  and Chinese Standard (GB2626-2006)  respectively.  The Plaintiff says that there is no indication that paraffin oil tests (as required by the EU Standard (EN149:2001+A1:2009 FFP2))  were carried out.  However, that does not suffice as evidence of failure to comply with the standard.

86.  Contrary to Mr Alder’s submission,[7] it is not for the Defendant to prove that the masks complied with the contractual standards.

87.  In the circumstances, the Plaintiff fails to establish that Shipment 2 failed to meet the contractual standards agreed between the parties.

G.  SHIPMENT 4: THE 750,000 XIANDA MASKS SENT TO THE USA

88.  The parties did not formulate a specific issue in relation to Shipment 4, but various defences were put forward by the Defendant in relation to the claim for Shipment 4.

89.  The Plaintiff says that Shipment 4 and Shipment 5 should be treated as one lot, failing to meet the EU Standard (EN149:2001+A1:2009 FFP2).  Whilst Shipment 4 was sent to the USA and therefore did not have to comply with the EU Standard (EN149:2001+A1:2009 FFP2), they were labelled as compliant with this standard.  Therefore, the shipment failed to meet the contractual condition that the labelling of the packaging of the masks should be accurate.

90.  The Defendant says that Shipment 4 should be severed from Shipment 5.  Also, the argument that the shipment was mislabelled was a mere afterthought.

G1.  Whether obligations in relation to Shipment 4 and 5 divisible

91.  Mr Wong submitted that the obligations to provide face masks in Shipments 4 and 5 were divisible obligations.  He cited Chitty on Contracts, 35^th ed., at paragraph 25-036, where the learned authors stated that the question of whether an obligation is entire or divisible depends on its construction in the light of all the circumstances, and Benjamin’s Sale of Goods, 12th ed., at paragraph 8-062, where the learned authors stated that contracts for the delivery of goods by instalments would more often be construed as severable, so that the innocent party would not necessarily be entitled to treat the whole contract as repudiated just because of a breach in relation to one instalment.[8]

92.  Mr Wong submitted that although the shipments were invoiced together (and indeed together with Shipment 3)  as one item, they should be treated as separate instalments, so that the breach relating to one instalment should not necessarily be taken as a breach relating to another instalment.  It was said that the masks were to be sent to different markets and that it was therefore likely that the parties intended that what happened to one batch would not affect the others.[9]

93.  For his part, Mr Alder submitted that the two shipments were not divisible.

94.  It seems to me that this point is something of a red herring.  The Plaintiff’s case in relation to Shipment 4 is not that the breach in relation to Shipment 5 should be taken as a breach in relation to Shipment 4,[10] as the Plaintiff does not say that masks sold in the USA needed to pass the test for the EU Standard (EN149:2001+A1:2009 FFP2).[11]  Rather, the Plaintiff’s case is that:

94.1  since Shipment 5 failed the testing carried out by DEKRA, it can be inferred that the masks in Shipment 4 would have failed the US Modified NIOSH Test in the USA had they been so tested.  Such a failure amounts to a failure of Shipment 4 to meet the condition that the masks should comply with the Chinese Standard (GB2626-2006);[12]

94.2  since Shipment 5 failed the testing carried out by DEKRA, it can be inferred that the masks in Shipment 4 would also have failed such testing (by DEKRA); and since the masks in Shipment 4 were labelled as compliant with the EU Standard (EN149:2001+A1:2009 FFP2), they were mislabelled (even though they were being sold in the USA).[13]

95.  Both of these arguments call for Shipment 4 to be considered separately from Shipment 5.  The Plaintiff did not suggest that it was entitled to reject Shipment 4 purely because of a breach in relation to Shipment 5 and in circumstances where there was no breach in relation to Shipment 4.

96.  For what the Defendant’s point is worth, however, I would make the following observations.  There is no evidence that Shipments 4 and 5 were treated as separate instalments.  As Mr Shen’s witness statement indicates, the Defendant itself also ordered the masks as one lot from Xianda.  There is no suggestion in the evidence that the Plaintiff took delivery of the masks in two separate instalments.  Brilliante was instructed to inspect 1,500,000 masks, not two separate batches of 750,000 masks. They were not designated (whether by Xianda or the Defendant)  into two different batches.  The fact that the Plaintiff subsequently divided them into two different shipments and sent them out to different destinations does not make the Defendant’s prior delivery of them two separate deliveries by instalment.

G2.  Whether DEKRA test results for Shipment 5 meant that Shipment 4 would have failed the US Modified NIOSH Test

97.  The Plaintiff accepted that the Chinese Standard (GB2626-2006)  (and therefore the US Modified NIOSH Test)  did not require passing a paraffin oil test.[14]  Accordingly, the mere fact that Shipment 5 failed the testing by DEKRA did not mean that Shipment 5 would also have failed the US Modified NIOSH Test.

98.  The Plaintiff therefore fails to establish that the Xianda masks in Shipment 5 failed to meet the Chinese Standard (GB2626-2006).

G3.  Whether DEKRA test results for Shipment 5 apply to Shipment 4

99.  However, that is not the end of the matter.  The Plaintiff says that nevertheless, Shipment 4 failed to meet the contractual conditions because of mislabelling.

100.  For this claim, it is first necessary to consider whether the DEKRA test results apply to Shipment 4.

101.  The Defendant says that just because Shipment 5 failed the testing by DEKRA, it does not follow that Shipment 4 would also have failed such testing (by DEKRA).  Mr Wong submitted that the two shipments comprised 1,500,000 masks and that it was improbable that they were made on the same day.  He argued that they would not even have been made from the same batch of raw materials, or with the same workmanship (although there was no evidence about these matters).  He further pointed out that the samples tested by DEKRA came from Shipment 5, and not from Shipment 4.

102.  However, there is no evidential basis to distinguish between Shipments 4 and 5 in terms of quality. All of the masks were manufactured by the same manufacturer (Xianda).  There is no evidence to suggest that there was any difference in the manufacturing process or quality between the two shipments.  Even if the masks were not all made from the same batch of raw materials, it does not follow that those in Shipment 4 were made from one batch of raw materials and those in Shipment 5 were made from another batch.  Similarly, it does not follow that even if there were any difference in workmanship or quality between the masks, such a difference would be reflected in the allocation of the masks to Shipment 4 and Shipment 5.  The masks were packaged in identical boxes.  There is no way, on the available evidence, to distinguish between the boxes that eventually formed Shipment 4 and those that eventually formed Shipment 5.  It just so happened that the Plaintiff arranged at some point to send half of the masks to the USA and half to Germany.

103.  There was no expert evidence to suggest that a sample of three masks could not be representative of the quality of the entire batch of 1,500,000.

104.  In the circumstances, logically, if the sample of masks from Shipment 5 failed the DEKRA testing, this should also be representative of the position with the masks in Shipment 4.

105.  The masks in Shipment 4 were therefore mislabelled as compliant with the EU Standard (EN149:2001+A1:2009 FFP2)  when they were not.

G4.  Whether Plaintiff’s case properly pleaded

106.  The Plaintiff’s case is that if the box containing a pack of masks says that the masks are compliant with a particular standard, then the masks should be of that standard (irrespective of the standard required by the destination country in question). This might appear somewhat counterintuitive, but it is what the parties have agreed, since it is common ground[15] between the parties that:

106.1   it was an express condition of the Contracts that the outer packaging of the masks, that is, the boxes containing the masks, should bear the contractual description of the type and standard of masks contained in the boxes, that is, a reference to the applicable KN95 standard; and

106.2   it was an implied condition of the Contracts that the masks should be properly packaged and labelled and the labelling of the packaging of the masks should be accurate.

107.  As Mr Alder submitted in his oral opening submissions, even masks destined for the USA would therefore have to comply with the EU Standard (EN149:2001+A1:2009 FFP2)  if that was what was represented on their boxes.[16]

108.  Mr Wong submitted that the Plaintiff’s case was an afterthought and not properly pleaded, the Plaintiff having realised that Shipment 4 was not tested under the US Modified NIOSH Test.  I was initially attracted to this argument.  Paragraph 11(4)  of the Amended Statement of Claim (“the ASOC”)  complains that upon the arrival of various batches of masks (including Shipment 4)  in the USA, the masks were mislabelled and their packaging inaccurately described them. Paragraph 12 goes on to say that several lots of masks were tested by DEKRA.  Paragraph 13 then says that in breach of the conditions of the Contracts, the defective masks did not comply with the pleaded standards, the statements on the masks themselves and their packaging.  There is no clear identification of a complaint that the masks sent to the USA were mislabelled and not compliant with their packaging because they failed to comply with the EU Standard (EN149:2001+A1:2009 FFP2)  rather than a USA standard.

109.  However, I note that the Plaintiff’s case had all along been pleaded on the basis that it was buying the masks for resale USA and/or Europe, that the masks were to comply with requirements of both the KN95 standard and European equivalents, that the outer packaging of the masks should contain an accurate description of the masks inside the package, and that the masks should comply with all specifications marked on their packaging including the KN95 standard and its European equivalent: ASOC paragraphs 5 to 7.  This was also the case advanced in Mr Zelter’s witness statement (see paragraph 7).  In other words, it was the Plaintiff’s case that all masks should comply with both the Chinese Standard (GB2626-2006)  and EU Standard (EN149:2001+A1:2009 FFP2), and their packaging should be labelled with both standards.

110.  Whilst the Defendant had denied any obligation to comply with USA regulations or the EU Standard (EN149:2001+A1:2009 FFP2), it had accepted that the masks should comply with the descriptions on their packaging: see Amended Defence paragraphs 6(3), 7.

111.  In both the Agreed Statement of Non-Contentious Facts and the Further Revised Agreed Statement of Non-Contentious Facts which the parties filed in the course of the trial, the Plaintiff accepted that each batch of masks had to be compliant with just the standards applicable to the destination in question.  Thus masks destined for the USA only had to comply with the KN95 standard (that is, the Chinese Standard (GB2626-2006)), whereas masks destined for Europe (also)  had to comply with the EU Standard (EN149:2001+A1:2009 FFP2)  (which meant that they had to pass the paraffin oil test).  However, it continued to be common ground that there were contractual conditions that the outer packaging of all masks had to bear a description of the masks inside, and that the labelling of the masks had to be accurate.

112.  It has all along been known that the Xianda masks were packaged in boxes labelled with both the Chinese Standard (GB2626-2006)  and the EU Standard (EN149:2001+A1:2009 FFP2).

113.  Ultimately, the purpose of pleadings is to ensure fairness.  It seems to me that the Defendant was sufficiently on notice of the Plaintiff’s case.  Indeed, Mr Wong did not suggest that the Defendant had been taken by surprise or suffered any prejudice by this aspect of the Plaintiff’s claim.

114.  In the circumstances, I would accept that there was a sufficient pleading of the complaint that the masks in Shipment 4 were mislabelled because their packaging represented that they complied with the EU Standard (EN149:2001+A1:2009 FFP2)  when in fact they did not.

H.  BREACH; ISSUE 11

115.  The conclusions that follow from my findings above are as follows.

116.  In breach of condition of the Contracts, the Jintailang masks (Shipment 3)  failed to comply with the Chinese Standard (GB2626-2006).

117.  In breach of condition of the Contracts, the Xianda masks sent to Germany (Shipment 5)  failed to comply with the EU Standard (EN149:2001+A1:2009 FFP2).

118.  In breach of condition of the Contracts, the Xianda masks sent to the USA (Shipment 4)  were inaccurately labelled as being compliant with the EU Standard (EN149:2001+A1:2009 FFP2)  when in fact they were not.

119.  It is not suggested that the masks could have been sold as compliant when they were not.  The masks in Shipments 3 and 5 were therefore not reasonably fit for the purpose of being sold as masks complying with the agreed standard and not of merchantable quality as masks complying with the agreed standard, the masks for all three shipments were not accurately labelled.

I.  LOSS AND DAMAGE; ISSUE 12

120.  Where a seller commits a breach of condition, the buyer can choose to treat the contract as terminated and sue for damages.  He can reject the goods and treat the seller’s failure to deliver goods in conformity with the contract as a case of non-delivery, so that the buyer’s damages will be assessed in accordance with s.53 of the Sale of Goods Ordinance (Cap.26)  (“SOGO”).  The provisions of s.53 are wide enough to entitle the buyer to recover any additional expenses incurred as a result of the seller’s breach. See Benjamin’s Sale of Goods, 12th ed., paragraphs 17-047 and 17-093.

121.  I have found that Shipments 3, 4 and 5 failed to comply with conditions of the Contract.  The Plaintiff rejected the shipments, and no issue has been raised as regards the validity of the rejection (other than the issue of whether the Plaintiff was entitled to reject the shipments in the first place).

122.  The parties agree that in the event that I find there to have been a breach of condition, it is s.53(2)  rather than s.53(3)  SOGO that applies.[17]

123.  The parties further agree that the points requiring determination in relation to the application of s.53(2)  are:

123.1   whether the Plaintiff establishes that it is entitled to claim for lost profits, in that the Defendant does not accept that the Plaintiff has proved the existence of contracts of resale for the masks for US$2.60;

123.2   the quantum of the damages for other consequential damage suffered by the Plaintiff.

124.  On the first point, Mr Zeltzer testified that there were specific orders (that is, contracts for sub-sales)  for all of the masks under Shipments 2 to 5, so that although the market price for KN95 masks had fallen by May 2020, the Plaintiff would nevertheless have been able to sell the masks ordered from the Defendant at the price of US$2.60 agreed with its customers.  It was put to him that the Plaintiff had failed to put into evidence the purchase orders from its customers.[18]  However, it was not suggested that Mr Zeltzer’s evidence was false (rightly so, there being no basis for so suggesting).  Having heard Mr Zeltzer, I accept him as a witness of truth, and find as a fact that the Plaintiff had contracts for sub- sales of all the masks under Shipments 2 to 5 for US$2.60.  Mr Alder referred to various other pieces of circumstantial evidence which were consistent with the existence of such sub-sale contracts.  However, that evidence did not specifically show that there were contracts of sub-sale of all the masks at US$2.60 per mask, so I do not place any weight on it.

125.  The Plaintiff is therefore entitled to claim for lost profits in respect of Shipments 3, 4 and 5. For the avoidance of doubt, such profits should be calculated net of the costs which the Plaintiff would have had to incur in order to earn the profits, such as the purchase price of the masks: Chitty, paragraphs 30-24 and 30-32.

126.  On the second point, Mr Alder helpfully produced a tabulation of the wasted ancillary expenditure being claimed,[19] and Mr Wong helpfully indicated the areas in dispute.  The items claimed fell into the following categories: (1)  freight and duty charges and (2)  storage charges.

127.  Regarding freight and duty charges, the Plaintiff ought not to be able to claim these as would have been incurred in order to make the profits claimed on the sub-sales.

128.  This leaves eight amounts for storage, which were incurred in respect of Shipments 3 and 4.  Of these, three amounts in the table,[20] being amounts charged under invoices all dated 29^th May 2020, were challenged. The Defendant’s case was that these three invoices were replaced by later invoices dated 16^th July 2020, all for a larger amount than the original three invoices as they covered the original period of storage covered in the earlier invoices, together with an additional period.  In the cross-examination of Mr Zeltzer, it was demonstrated that the later three invoices covered the waybills referred to in the earlier three invoices, and Mr Zeltzer accepted that the later invoices replaced the earlier ones.  The plaintiff therefore fails to establish its claim for wasted expenditure under the three invoices of 29^th May 2020 for storage.

129.  The Plaintiff is therefore entitled to claim for wasted ancillary expenditure, being storage charges for Shipments 3 and 4, under the two invoices dated 1^st June 2020 and the three invoices dated 16^th July 2020, but not the other items in the table.

130.  The Plaintiff mitigated some of its loss by selling most of the masks in Shipment 5 for a total of US$140,478.40.  The Plaintiff should give credit for this amount.

131.  The Defendant fairly accepts that pre-judgment interest at the rate of 1% above the HSBC best lending rate should apply.

J.  DISPOSITION

132.  I therefore give judgment to the Plaintiff on its claim in respect of Shipments 3, 4 and 5 as indicated in the previous section.

133.  I further make an order nisi that the Plaintiff is to have 90% of the costs of and occasioned by the action.  The Plaintiff abandoned its claim in relation to Shipment 1 only on the first day of trial, which meant that over four years’ worth of costs, including preparation for trial, was wasted.

134.  The parties should draw up an agreed draft order for approval within 7 days.